By CRAIG HARRIS, P-I REPORTER

Published 10:00 pm, Thursday, March 22, 2007

When Borders needed a high-powered and efficient Web-based delivery service six years ago, the book giant courted Seattle's Amazon.com.

But now the marriage has ended, and it could put a crimp on Amazon's revenue and earnings, one analyst says.

The Ann Arbor, Mich.-based Borders Group Inc. said Thursday that it was severing ties with Amazon and will compete directly early next year against the Internet retail company, which has gone from selling only books to a wide range of products, from DVDs to clothing to food.

"We expect to drive sales and profits with it," Borders spokeswoman Anne Roman said of the company's planned Web site.

"We can mesh the in-store sales with online, which is something we have been missing."

Roman said the Web site would allow Borders to connect with 17 million customers who are part of the company's rewards loyalty program. Roman declined to disclose if its contract with Amazon had ended.

Before 2001, Borders had its own Internet business, but it wasn't profitable, Roman said. That led to the arrangement with Amazon, which operated Borders' Web site, took orders and delivered books.

Amazon obtained all the sales and gave an undisclosed cut to Borders, Roman said. Amazon also runs the Web sites for Target and Bebe and fills the orders.

The loss of Borders could cost Amazon $80 million to $160 million in annual revenue, according to an estimate by Scott Devitt, an analyst with St. Louis-based Stifel, Nicolaus & Co. Amazon and Borders wouldn't confirm or deny those figures.

Devitt said the loss isn't material to Amazon, which had revenue of $10.7 billion last year and $190 million in profits.

Devitt said the loss of Borders could result in a 2 percent decline in profits for Amazon.

However, Devitt said, Amazon could gain market share in book selling over time because it will have an advantage over Borders, which now will charge a sales tax for all books sold.

Companies have to charge a sales tax for Internet sales if they have a physical presence in states that collect sales taxes, Devitt said.

Amazon collects sales taxes only on books sold in Washington, North Dakota, Kentucky and Kansas. Borders would collect sales taxes in all 50 states, the company said.

Devitt also said Amazon has been successful in undercutting competitors with lower prices because of its sophisticated distribution system and shipping deals it provides to customers.

Borders' Web site announcement came as the company said it was shuttering nearly half of its Waldenbooks stores.

Borders reported a fourth-quarter loss of $73.6 million compared with a profit of $119.1 million the previous year.

The company also said it would continue its relationship with Seattle's Best Coffee, a coffee company owned by Starbucks Corp.

Roman said Borders has converted a majority of its existing cafes to Seattle's Best Coffee Cafes in its stores, and sales have been "impressive."